Opponents

Decimalization and extended trading have plenty of critics. An electronic survey conducted during the Security Traders Association's conference in Palm Desert, Calif. revealed that more than 60 percent of attendees surveyed strongly agree with the statement, I am concerned about how decimalization will affect the markets.' Nearly 20 percent of the respondents agreed. Moreover, 45 percent of respondents said their firms won't be ready for decimals. About 70 percent said the quote and trade increment should be five cents in decimal-based pricing.

On extended trading hours, more than 60 percent of respondents said the markets should not add extra sessions. These respondents also said they did not know if they would participate in after-hours trading. About 80 percent of the respondents said participation should be voluntary. On other issues, more than 70 percent of respondents said they do not plan to use OptiMark. More than 80 percent said Nasdaq should adopt a trade-through rule. The number of respondents fluctuated between 130 and 139 attendees. The survey is separate from an earlier survey conducted this year for the STA.

Best Execution

Broker dealers were advised at the STA conference to keep voluminous documents on their best execution practices. The advice came from Thomas Gira, a vice president in the quality of market unit at Nasdaq Regulation. Gira suggested that firms establish best execution committees to oversee their firm's best execution efforts. Gene Gohlke, associate compliance director at the SEC, said the commission is conducting a sweep of broker dealers that handle orders of under 500,000 shares. The focus is on where introducing firms choose to send their orders.

Firms are reconciling investors' demand for immediate executions over price improvement. If the public is looking for immediacy "then something has to give," said Tony Sanfilippo, an executive vice president at Knight/Trimark Group. He said public customers look for immediacy first, followed by liquidity enhancement and then price improvement.

Sentry Duty

Traders at Mayer & Schweitzer may soon be logging longer hours. Parent company Charles Schwab & Company recently announced that it would offer its customers after-hours trading.

At first, orders would be directed to REDIBook, the Spear, Leeds & Kellogg ECN, in which Schwab has a stake. But eventually, Mayer & Schweitzer will step in and commit capital, said Lon Gorman, Schwab's president of capital markets & trading. "We have six or seven volunteers at Mayer & Schweitzer for a second session," said Gorman. "These are young traders who are looking ahead in their careers."

Gorman added that Schwab will postpone making the decision to add human traders for a couple of months as it assesses the size of the REDIBook order flow. The executive is confident in the venture's success, however, noting that Schwab handles 25 percent of the online business while one-third of its customers live in California.

The market there now closes at 1:00 pm. With 55 traders, Gorman said he does not anticipate hiring new pros to staff the after-hours operation.

Concept Release

The Securities and Exchange Commission will publish a concept release seeking public comment on the regulation of the short sale of securities.

Annette Nazareth, director of the SEC's division of market regulation, said the goal is to modernize the agency's approach and "to assess whether the restrictions [of the rule] produce benefits that are proportionate to the cost of these restrictions." Nazareth, who was speaking at the STA's conference, said a concept release on market data fees is also in the pipeline.

Separately, Nazareth weighed in with her own views on decimalization, urging the adoption of nickel increments as an interim step towards penny ticks.

"While decimals will clearly make our securities prices more comprehensible, it also raises large market structure issues," she said.

Day trading firms are bracing for tough new regulations that may be imposed on their activities by the National Association of Securities Dealers and the Securities and Exchange Commission.

The new regulations would likely take aim at the most controversial areas of day trading, uncovered in recent scrutiny of day trading by state securities regulators, Capitol Hill sources say.

Nancy Condon, a spokeswoman for the NASD Regulation, said her organization would have no comment until after the SEC returned collected comments on NASD Regulation's proposed rule 99-42 sometime after Oct. 12 (and after the self-regulatory organization had time to formulate its responses).

Comments by SEC Chairman Arthur Levitt and Senate Banking Committee Chairman Phil Gramm (R-Texas) aren't clearing the air.

Gramm opposes the proposal by NASD Regulation, the regulatory arm of the NASD. The proposal would require day-trading firms to reject potential customers whose financial resources, experiences, and goals are judged unsuitable for the risky investments commonly exchanged on a daily basis.

"You can't protect people from making bad decisions," Gramm said during an interview following a recent hearing at the Senate Permanent Investigations Subcommittee. "You're getting into a level of paternalism that I'm not going to support."

Conflicting Signals

Meanwhile, Levitt sent conflicting signals with his written testimony filed for the hearing and his oral testimony delivered in person.

"I certainly feel there's a responsibility on the part of any firm to see to it that individuals who are clearly not in a position to engage in that kind of activity not be allowed to trade," Levitt told the investigations panel during oral testimony.

In written testimony, however, Levitt said, "If day traders are adequately apprised of the risks of their day-trading strategy, the commission believes that individual day traders bear responsibility to make sure that they do not trade with funds they cannot afford to lose."

So, which is it? Investor responsibility, or the responsibility of the day trading firms? The SEC declined comment, referring a reporter to Levitt's statements to the subcommittee.

Gramm's Banking Committee spokesperson, Christi Harlan reiterated Gramm's sentiment that "he really feels that there's not much of a rule you can write to protect people who are determined to lose money."

Electronic Traders Association (ETA) President James Lee prefers to look on the bright side: "I think Sen. Gramm has the right idea about this…Once customers are apprised of the risk, customers need to be responsible for their own actions." (The ETA is the umbrella organization for electronic day-trading firms.)

Lee is encouraged by Levitt's written testimony, quoting the SEC chairman that there are isolated problems with day-trading firms' advertising, but nothing systemic or pervasive.

However, in his oral testimony, Levitt also told the panel, "Our preliminary findings indicate that many [day-trading] firms have extremely lax compliance practices. The inability of some firms to monitor their adherence with capital, margin, and the short sale rule, or to maintain adequate books and records raises serious concerns.

Lee contends that the NASD and the SEC are to some extent caught up in a manufactured hysteria: "This isn't the industry against day trading; it's really (regulators) out on an island."

Securities and Exchange Commission Chairman Arthur Levitt, a target for traders angry with his agency's overhaul of the equity markets, came out swinging for market makers at Columbia University Law School in New York.

In one of the most far-reaching speeches in his SEC career, Levitt acknowledged the unfairness of the access fees charged by electronic communications networks to market makers. These are the same fees, of course, unleashed by the order handling rules introduced by his agency.

Levitt said these fees are unfair. "Because brokers often have little choice but to pay whatever fee is charged by the ECN," he said, "competitive pressures on these fees have been all but paralyzed."

The SEC Chairman said he has instructed his staff, "to recommend the best approach towards restoring a fair, competitive balance in this important area."

Creating a Stir

Levitt's speech was widely expected to stir up the juices on Wall Street, having been partly leaked to the media days in advance. And Levitt, credited with a fine sense of timing, did not disappoint.

"We have an opportunity today that I don't think we'll have again in our lifetime – to realize the vision for a true national market system – one that embraces our future as much as it honors our past," he said.

Aware of the structural changes that are rocking the U.S. securities markets, Levitt called for fairness on another front. He said the New York Stock Exchange's Rule 390, which prohibits exchange members from dealing listed securities on other exchanges, should "not be part of our future." He said effective self-regulation must not be overlooked if U.S. stock markets become publicly traded companies. And he said "in the name of more competition, more connected, and more liquid options markets, we still have a ways to go."

Most significant, Levitt opened debate on the controversial subject of market fragmentation, asking, "Should we consider pulling together electronically all limit orders and quotes displayed internally in the various markets – creating a virtual limit order book?"

Levitt didn't call for legislation to reform or centralize or modernize the stock exchanges. But he did say he was "intrigued" by the possibility of creating a single regulatory body to oversee member regulation, sales practices, and all other aspects of intermarket trading. That would leave each market responsible for its own separate regulatory and surveillance functions

Does Congress care? Right now, Congress is eyeing other areas of securities reform. The chairman of the Senate Banking Committee, Sen. Phil Gramm (R-Texas), has been busy with the Financial Services Modernization Act. But Securities subcommittee Chairman Rod Grams (R-Minn.) will probably take Levitt's remarks into account as he crafts an updated Securities Markets Enhancement Act. His spokesman said Grams declined comment on Levitt's speech.

One market participant privately worried that federal legislation could take ages to pass, while the outcome would be far from certain.

The SEC didn't have anything to add to Levitt's comments, either. "If you pay close attention to his text," said SEC spokesman John Heine, "these are invitations to discuss." But no formal discussions have been proposed between the chairman and industry leaders, Heine conceded. The lives of their members could be revolutionized by Levitt's recent words. Heine wasn't aware if Levitt had any follow-up plans for his many suggestions. Perhaps he doesn't need any.

"We unveiled a new system the other day that we hope will become operational next year," said Wayne Lee, a spokesman for the National Association of Securities Dealers, describing Nasdaq's Order Display Facility.

"This system would accomplish some of the things Mr. Levitt has called for," Lee said, "in terms of creating a more centralized marketplace."

Reaction

Levitt's call for a more unified marketplace, spurred by the competition triggered by new securities regulations, has not fallen on deaf ears, however.

While Iselin, N.J.-based Island ECN and Archipelago Holdings in Chicago have applied to become registered exchanges, competing with Nasdaq and the NYSE, other ECNs led by Reuters Group's Instinet joined forces in September to share stock quotes during after-hours trading. In July, brokerage industry giants Fidelity Investments, Charles Schwab and others linked up in a new electronic trading system.

Market analysts believe many upstart markets will consolidate or be absorbed by the major exchanges.

Island ECN general counsel Cameron Smith applauded Levitt's call for a more unified marketplace. "That's definitely where we should be moving," Smith said. "We will definitely get there. It's just a matter of time."

Competition as a lever for unification? Some don't buy it. "Levitt is proposing a shotgun marriage," said Alan Davidson, president of the Independent Broker Dealers Association. "What we really need to do is eliminate the overlap of regulatory organizations." Membership in Nasdaq, whose NASD board Davidson was elected to last December, is 90 percent filled by small companies, the IBDA president noted. The NYSE is dominated by big business. "Sometimes in a shotgun marriage the families of the groom and the bride don't mix so well," Davidson said.

A Lever

James Lee, president of the Electronic Traders Association, sees competition more as a lever for reform. "It's a performance issue," Lee said. "That's where [the SEC] should be focused, rather than the regulators believing there is some regulatory arbitrage between the two systems." Rushing toward a single self-regulatory organization for all markets might actually slow reform, he says. "The NASD is to Island what the post office is to Federal Express," Lee said. "I don't think it's an accident why people are moving to ECNs. Speed and performance is the name of the game."

At Columbia, Levitt pondered technology as the midwife of future markets.

"The guiding principles are clear: price discovery and best execution should be enhanced; liquidity should be fostered; interaction between institutional and retail trading should be maintained; market innovation should be encouraged; and competition among market centers, above all else, should remain vigorous and dynamic," he said.

"Today," Levitt said, "technology may afford us the opportunity to better achieve these goals once thought to be mutually inconsistent."

Securities reforms on Capitol Hill are likely on hold until next year.

Congress, anxious to go home and hit the hustings, was likely to adjourn as of press time.

"The bill hasn't even been written

yet," said Christi Harlan, a spokeswoman for Senate Banking Committee, referring to prospects for an updated Securities Markets Enhancement Act (SMEA).

Committee action would follow the drafting of proposed legislation and any hearings conducted by Minnesota Republican Sen. Rod Grams' securities subcommittee, Harlan added.

Senators are currently focusing their energies on getting S. 900, the Financial Services Modernization Act, out of a conference committee, so it can be sent to President Clinton for his review, she said.

Last Bill

The last SMEA bill was passed in 1997. Market reform proponents have flooded Banking Committee Chairman Sen. Phil Gramm (R-Texas), and members of the securities subcommittee, with wish-lists for additional legislative change.

One proposal of interest to market makers is the prohibition of Section 31 fees during low-volume trading sessions and non-traditional trading hours. The Securities Industry Association has submitted more than 70 other suggestions.

Gramm has already killed at least three SIA proposals he believed would have doomed a new SMEA bill. "It has been our goal from the beginning to produce legislation that enjoys wide support," he said in a prepared statement.

The three rejected suggestions are:

* A plan to end licensing of brokers by the states;

* A proposal to establish a single self-regulatory organization to oversee brokerage firms;

* A recommendation to forbid states from imposing broker or dealer registration requirements in addition to, or different from, those mandated by the Securities and Exchange Commission.

Many more of the SIA's suggestions concern loosening state involvement in the securities industry. One would prohibit state regulators from bringing "duplicative cases based on the same underlying conduct merely to extract a financial payment unrelated to investor protection."

Another suggestion would eliminate state filings of disciplinary actions as long as such records are "readily available to the state… through a national securities association" such as the SEC.

An official at the North American Securities Administrators Association (NASAA) has contended that the latter proposal could be quite controversial. "The SIA is essentially saying to states, Let the NASD run the [Central Registration Depository]'," the official was quoted as saying in an industry publication. The NASD offers only an abridged version of such records.

Other industry proposals still under Senate consideration include adding a statement of policy to the SEC's rulemaking and oversight responsibilities under the Securities Act of 1933.

That statement of policy would signal that competitive market forces be permitted to shape market structure and participant behavior without undue government involvement.

The statement would urge the national securities markets to foster responsibility and accountability by all market participants, including brokers, dealers, issuers, and investors for the regulation of the nation's bond markets.

Limitations

Another industry proposal would prohibit limitations by the National Association of Securities Dealers, other self-regulatory organizations, and the states, on dealer markups and profits from debt securities.

A spokesman at the securities subcommittee of the Senate Banking Committee said Gramms' staff is studying comment letters on the proposals. He will craft legislative language for a new SMEA bill from the patterns that emerge, the spokesman said. No hearings will be set until the bill is written.

Both major U.S. stock exchanges are now agreed: their public offerings of stock will wait at least until after the first of next year. But at least one is considering a new strategy for drumming up additional capital.

NASD may look into a private placement, prior to an IPO to fund its expansion and acquisition plans "in the short term," explained Scott Peterson, spokesman for the National Association of Securities Dealers. An initial public offering "won't happen in 1999," he added.

A private placement would make shares in NASD available to brokerage firms and perhaps some companies already listed on the exchange, Peterson explained. NASD would probably get a minority stake in any NASD private placement, he said. He declined to elaborate.

Ray Pellecchia, spokesman for the New York Stock Exchange, said the NYSE board recently approved "continued exploration of demutualization, and those discussions would go into next year." He also declined to elaborate.

Why the slowdown, following such a public rush? After all, it was just this summer that both exchanges were the subject of on-record-off record reports they would start selling their own stock, perhaps as early as October.

Both NYSE and NASD denied the other's plans were having any impact on their own schedules. John Heine, a spokesman for the Securities and Exchange Commission said the federal overseer had nothing to add to SEC chairman Arthur Levitt's comments in recent speeches.

Both exchanges have expressed support for spinning off their SRO functions. NASD is halfway there, with its NASD Regulation unit.

But NYSE Chairman Richard Grasso has repeatedly nixed proposals to merge the two regulatory arms, saying NYSE's regulatory arm is "an investment in our brand."